Question

XYZ Company, a 'for-profit' business, had revenues of $15 million in 2018. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $1.3 million. XYZ Company, must pay taxes at a rate of 40 percent of pretax (operating) income. All revenues were collected in cash during the year, and all expenses other than depreciation were paid in cash.

What was XYZ’s profit margin?

A: 2.3%

B: 5.7%

C: 7.5%

D: 9.8%

Answer 1

Profit Margin

Profit Margin is calculated by using the following formula

Profit Margin = (Net Income / Total Revenue) x 100

Total Revenue = $15 Million

Expenses other than Depreciation = $11.25 Million [$15 Million x 75%]

Depreciation Expenses = $1.30 Million

Net Income = (Total Revenue – Expenses other than Depreciation – Depreciation Expenses) x (1 – Tax Rate)

= ($15 Million - $11.25 Million - $1.30 Million) x (1 – 0.40)

= $2.45 Million x 0.60

= $1.47 Million

Therefore, the Profit Margin = (Net Income / Total Revenue) x 100

= ($1.47 Million / $15 Million) x 100

= 9.80%

“Hence, the XYZ's Profit Margin is (D). 9.8%”